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European equities are geographically well diversified, deriving 57 per cent of their revenues from outside of Europe. This compares to 30 per cent for the US and 40 per cent for Japan. The revenue exposure to the domestic economy has gradually declined over time, from a peak of 58 per cent in 2005 to a new low of 43 per cent as of this year. Meanwhile, sales to the Asia-Pacific region make up an increasingly large part of the revenue generation of European-list companies, up from 9 per cent in 2005 to 19 per cent in 2021. Given their large exposure to other regions, European equities are usually considered a proxy play on the health of the world economy.
The same holds true when looking on an individual country level within Europe. With the exception of Italy, national equity indices have little exposure to their domestic economies. As such, performance divergence between the countries is very much a function of their sector composition. Infact, since the intoduction of the euro, country selection has only mattered more than sector selection for a short period of time during the peak of the euro area crisis (from 2010 to 2012). Thus, in the absence of any important domestic catalyst, country positioning within Europe is mainly derived from the sector strategy.
The CAC 40 index, France’s benchmark equity index, has a high exposure to more internationally oriented sectors. Healthcare, consumer-related, and commodity-related sectors make up more than half of the index, while domestically oriented secors (financials, real estate, utilities and communications) have a lower weighting relative to the Stoxx Europe 600. As such, the CAC 40 index poorly reflects the domestic growth backdrop and policy setting in France.
For instance, France is home to many luxury stocks which are listed in Paris, and the majority of these companies generate only single-digit revenue in the domestic market. Among the major European country indices, the CAC 40 index currently shows the strongest earnings momentum, which has helped the market to outperform its peers on a year-to-date basis.
Geman equities are heavily geared towards global growth given their above-average exposure to cyclial sectors. With 65 per cent of revenues derived outside of the euro area, the DAX is one of the most international indices. The exposure to China is especially large given, among other things, the importance of car manufacturers in the DAX index, which derive roughly 20 per cent of their sales in China. As such, German equities usually suffer to a larger extent from any meaningful slowdown in the Chinese economy.
The headwinds from the Chinese economic slowdown will likely persist into early 2022, presenting a challenge for German equities going forward. That said, companies in the German DAX index are increasingly exposed to structural growth markets and should therefore be able to navigate the challenging macroeconomic environment.
Compared to its European peers, Italian equities are more exposed to the domestic market (+44 per cent). The above-average domestic exposure can be mainly attributed to the higher weighting of the financials and utilities sectors, which together make up to half of the index (vesus 20 per cent for the Euro Stoxx 50) and generate the majority of sales within Italy. The smallest sector weights are in consumer defensives, information technology, and commuications. As a result, the index is heavily tilted towards cyclical and value-oriented sectors.
Historically, Italian equities have outperformed their European peers when bund yields rise due to their high exposure to the banking sector, and when Italian bond spreads decline, which is a proxy for Italian risk. Since the start of the year, the FTSE MIB, Italy’s equity benchmark index, has outperformed European equities, mainly thanks to the stellar run in bank stocks.
IBEX, Spain’s benchmark stock market index, shares some similar characteristics with Italian equities in terms of sector exposure. Financials (28 per cent) and utilities (20 per cent) are the two biggest sector weights in the index. Consequently, Spanish equities have an above-average exposure to the domestic economy (33 per cent), albeit to a smaller extent than Italian equities. Looking at the regional exposure, Spanish equities are overexposed to Latin America (19 per cent of sales) and are thus affected by developments and prospects in that region, which have lately taken a turn for the worst.
Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.
For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Similarly, any views or opinions expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the particular circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views, or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. CC does not accept liability for losses suffered by persons as a result of information, views, or opinions appearing on this website.
Calamatta Cuschieri Investment Services Ltd is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act.
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